Todd Haugh on Discounts for Deferred Proceedings

The monetary penalties imposed for serious corporate offences are consistently reduced below the lower end of the range of fines calculated under the Sentencing Guidelines for Organisational Offences, and sometimes even below the monetary benefits that the companies obtained as a result of their criminal conduct.

These are the conclusions reached by Todd Haugh and Mason McCartney in an article titled “DPA Discounts”.

The article found that calculations of the guilt index made under the guidelines, which aim to adjust a company’s final penalty to the level of the offences, have no statistical significance when determining penalties.

“Instead, the Justice Department appears to have developed a rigid standard of granting a nearly uniform 25 percent discount on the minimum fine, regardless of a company’s fault,” they write.

“This norm is remarkably consistent despite the wide variability in corporate behavior and the likely negotiating positions of prosecutors and corporate defendants. These findings challenge the current oversight of deferred and non-prosecution agreements and, ultimately, their application in combating corporate crime, thereby shedding new empirical light on what has become the primary means of holding our most notorious corporate criminals accountable.”

Todd Haugh is an associate professor of law and business ethics at the Kelley School of Business at Indiana University.

“There is a hard standard in the Justice Department that these deferred and non-prosecuted agreements are discounted below the lower end of what the calculated guideline fine should be, by about 25 percent,” Haugh said. Corporate Crime Reporter in an interview last month. “And that doesn’t change much depending on the guilt of the offender.”

“This finding contradicts the idea that it’s supposed to lead to guilt and be reflected in the penalty. It turns out there’s almost a standard discount for just entering into one of these contracts.”

“This was a preliminary empirical look at deferred prosecution agreements in the context of the Foreign Corrupt Practices Act (FCPA). And we’re going to expand on that and see what we find in terms of penalty reductions more broadly.”

How many cases have you reviewed?

“The total database contained about 600 cases. We focused on them from 2011 onwards. We decided to look only at FCPA cases.”

“There were about 75 FCPA cases, but only 45 of them were deferred prosecution agreements that contained enough information to pull this data. Then we added a bunch of non-prosecution agreements. We ended up with 55 FCPA deferred prosecution agreements that we reviewed.”

Do the vast majority of them have to be large companies?

“We didn’t do detailed metrics on company size. But just judging the cases by eye, yes, the vast majority are large companies.”

Do you think the Department of Justice makes more lenient deals with large corporations than with smaller companies?

“I don’t have the data. But anecdotally, when you look at corporate convictions, it’s mostly small companies. Large companies tend to get deferred action or non-prosecution agreements.”

How do you explain these differences?

“If you’re a prosecutor going after a large corporation, one of the things you have to think about is, what’s the impact on the employees, on the shareholders? If you’re convicted, there’s at least the possibility that the company would be barred from doing business with the government. For a company like Boeing, that would be a consideration for why they got a deferred prosecution agreement, not a conviction.”

“That’s one thing. The other thing, especially with an FCPA case, is that international cases are very difficult to prosecute. You need the cooperation of the company. And you need to provide incentives to achieve that. It would be difficult to prosecute many FCPA cases without that. That includes not going to a traditional trial and getting a conviction.”

How did you assess guilt in your work?

“We used the organizational sentencing guidelines. There’s a Department of Justice handbook that prosecutors use to determine whether a company qualifies for a deferred action or a non-prosecution agreement. The prosecutor is also required to review the organizational sentencing guidelines. Those guidelines include a calculator that takes into account guilt. And then there’s a multiplier based on other factors.”

“So we can see the upper and lower range of the penalty. Then we look at what the company actually paid and what the discount was that the Department of Justice gave below that lower range of the fine.”

Give us a specific example of your discovery.

“Sentencing guidelines give a company points when determining punishment. For example, how much money the company received for its offense. If the company received a lot of money for multiple offenses, the level of offense will be higher. If you bribe a high-level public official, you’ll get more points.”

“You get a total number of points that sets a base fine level. That’s a starting point in terms of the seriousness of the offence. Then there’s a guilt score. That’s based on how big the organisation is, whether it was a collaborator, things like that. Then you multiply that base offence level by the guilt score and you get a range.”

In the case of Vimpelcom, for example, the range was $836 million to $1.6 billion. The base fine was about $520 million. But the final fine imposed was $460 million. It was 45 percent below the lowest range of the fine. And it was below the base amount.”

“Vimpelcom got a 45 percent discount from the lowest price range. That’s a huge discount.”

Why would a judge approve such an agreement if it violates guidelines?

“The point is that the guidelines only apply in the event of a conviction. The Justice Department’s manual directs prosecutors to calculate the guidelines range to determine the sentence.”

“Our work says there’s a norm of just giving discounts. A judge can say, I don’t think that’s enough, or I think the penalty should be higher. But judges have tried to get their foot in the door on these deals, and the appellate courts have said no.”

“These are essentially private contracts between the Justice Department and the companies.”

What is the Justice Department’s explanation?

“I think they’re going to say, we need to encourage companies to come forward, to enter into these agreements. Then they’ll come and help us bring cases against individuals. And then they’ll agree to make compliance improvements. They’ll improve internally. In order for us to do that, we need to give credit to companies that are lowering the lower end of the penalty range.”

“I understand that argument. But the article makes it seem like that 25 percent discount is kind of a given.”

“We argue for more nuance. Sometimes you have to get cooperation from a company because you don’t have a strong hand as a prosecutor. And so you might have to give them a pretty big discount. And you have to weigh a lot of factors. But more or less you would expect there to be a discount, but you would still be within the guidelines.”

“It’s just not happening. Some companies are getting huge rebates, but the vast majority are getting 25 percent. And again, these are just FCPA cases. We’re looking at other cases, but I think the answer will be generally yes.”

“In FCPA cases, about 30 percent of the cases we reviewed imposed an overall penalty below the base fine. That’s less than the benefit the company got from the crime. That means it makes economic sense to commit the crime.”

What percentage of the cases you reviewed involved penalties lower than the base fine?

“In eleven of the agreements, they are within range. In sixteen of the 46 agreements – 35 percent of the cases – the total penalty is less than the base fine alone.”

How many cases were covered by the 25 percent discount?

“Eighty percent of the time, they get a discount that’s less than the lower end of the range. Those discounts tend to cluster around 25 percent.”

You also point out that in recent changes to FCPA policy they offer larger discounts for cooperation. Isn’t that part of the explanation?

“The FCPA pilot program said, we’re going to give 25 percent rebates to encourage companies to work with us. That’s probably why you have this cluster around 25 percent. Now you’re seeing the Department of Justice moving toward higher rebates, 50 percent or higher rebates. Our concern is, is this going to be the new norm?”

What are the signs that the Department is moving toward a 50 percent reduction?

“The new rules that came out early last year were for the FCPA pilot program and they said – we will consider larger discounts in these cases – instead of just 25 percent, they are considering moving to discounts of 50 percent or even higher.”

What should the Department do?

“The department should go back to the guidelines. Let’s set a fine range and then make some determinations within that range. Is the company taking steps to improve its culture? The department would keep the penalties within the sentencing range.”

“Currently, the Department calculates a range and then begins to provide discounts at the lower end of the range. It is now very rare for a company to be penalized in the range, let alone above it. This is unlike any other area of ​​federal sentencing policy.”

“And you end up with a headline that says, the company is going to pay $2 billion. That’s a huge amount. But when you actually look at what the range of the fines should be under the guidelines, you see that $2 billion is at the low end of the range or below the low end of the range.”

(For the full Q&A, see the interview with Todd Haugh, 38 Corporate Crime Reporter 26(13), June 24, 2024, available in print only.)